Equities are on their second day of a bear market rally after last week’s steep sell-off. This is the seventh bear market rally of 2022. Bear market rallies take many forms. There have been several examples this year of the market rallying on the hope that bad news for the economy would lead to “good news” from the Fed (i.e., the elusive pivot).
But this time, investors are getting a relief rally. A relief rally is a specific kind of bear market rally that is fueled by positive news that breaks the negative momentum. In this case, investors are responding to early earnings reports that have been better than expected regarding corporate earnings.
That may not be as surprising as it seems. The PPI and CPI numbers showed that inflation is still at 40-year highs. This means that, for now, companies are still at least considering price hikes. And even those that aren’t are weighing the higher cost of wages as a headwind to lowering their prices.
One characteristic of a relief rally is that prices do not move higher than prior levels of resistance. This was a point we made to investors who subscribe to MarketBeat’s The Early Bird newsletter:
“The rally peaked out below the prior week's high and the 3,700 resistance target despite better-than-expected results from many of the nation's largest banks...If the market cannot get above 3,700 by the end of the week the odds of another sell-off in equities will grow.”
This article will present some ideas for active traders and buy-and-hold investors to follow during this relief rally.
How to Trade This Relief Rally
Relief rallies can last for some time, or they can disappear quickly. This year has been more of the latter. So the bad news is if you haven’t already been looking for stocks that were candidates for a relief rally, you might be out of time.
But if you have some stocks in your portfolio or on your watch list, here are some trading ideas. These are ideas you should act on only when you see that the market is showing some stabilization:
- Look for large-cap stocks that are trading with a low P/E ratio.
- Look for growth stocks that are setting up for a short squeeze. Be sure to use tight stops, or better still, use options to manage your risk.
- Now may be the time to look at value stocks that are oversold but in a long-term uptrend
MarketBeat has several stock screeners that can support your own technical analysis as you look for the stocks that fit your trading goals. The time-honored advice of having a plan and sticking to that plan is never more important than when trading in a relief rally.
Should You Continue to “Hold On” to Your Stocks?
There was some talk that last week’s sell-off was the capitulation that the market had been looking for. The thought (and maybe hope) was that many retail investors that had been staying in the market were finally heading for the exits. This is historically a sign that the market has bottomed out.
But if you’re reading this article, you’re likely not one of those investors, so your playbook is simple. Know what you own. Look for opportunities to average cost down when possible. And focus on dividend-paying stocks so you can at least get paid to hold a company’s stock while you wait.
Some Final Thoughts
Planning for the worst and hoping for the best is always good advice, particularly in bear markets. With the price action in the market this year, the relief rally may be over before I’m done writing this article.
That’s not hyperbole. There is nothing to suggest that the bear market will be over anytime soon. In fact, historical trends suggest we have much further to go. At the same time, waiting for the market to reach an absolute bottom is not a successful strategy for most investors.
The overall takeaway stays the same for traders and investors. Quality matters. Buy the best and (for now) forget the rest.
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